BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AB 1331 HEARING: 6/11/14
AUTHOR: Rendon FISCAL: Yes
VERSION: 5/8/14 TAX LEVY: No
CONSULTANT: Grinnell
CLEAN, SAFE, RELIABLE DRINKING WATER ACT OF 2014
Enacts the Clean, Safe, Reliable, Drinking Water Act of
2014.
Background and Existing Law
I. Bond Acts. When public agencies issue bonds, they
essentially borrow money from investors, who provide cash
in exchange for the agencies' commitment to repay the
principal amount of the bond plus interest. Bonds are
usually either revenue bonds, which repay investors out of
revenue generated from the project the agency buys with
bond proceeds, or general obligation bonds, which the
public agency pays out of general revenues and are
guaranteed by its full faith and credit.
Section 1 of Article XVI of the California Constitution and
the state's General Obligation Bond Law guide the issuance
of the state's general obligation debt. The Constitution
allows the Legislature to place general obligation bonds on
the ballot for specific purposes with a two-thirds vote of
the Assembly and Senate. Voters also can place bonds on
the ballot by initiative, as they have for parks, water
projects, high-speed rail, and stem cell research, among
others. Either way, general obligation bonds must be
ratified by majority vote of the state's electorate.
Unlike local general obligation bonds, the state's
electorate doesn't automatically trigger an increased tax
to repay the bonds when they approve a state general
obligation bond. Article XVI of the California
Constitution commits the state to repay investors from
general revenues above all other claims, except payments to
public education. California voters approved $38.4
billion of general obligation bonds between 1974 and 1999,
but approximately $95 billion since 2000.
AB 1331 - 5/8/14 -- PageB
Bond acts have standard provisions that authorize the
Treasurer to sell a specified amount of bonds, and
generally include several uniform provisions that:
Establish the state's obligation to repay them, and
pledge its full faith and credit to repayment,
Set forth issuance procedures, and link the bond
act to the state's General Obligation Bond Law,
Create a finance committee with specified
membership, chaired by the State Treasurer,
Charge the committee to determine whether it is
"necessary or desirable" to issue the bonds,
Add other mechanisms necessary for the Treasurer
and the Department of Finance to implement the bond
act, including allowing the board to request a loan
from the Pooled Money Investment Board to advance
funds for bond-funded programs prior to the bond sale,
among others.
In bond acts, the Legislature generally:
Sets forth categories of projects eligible for bond
funds, such as library construction or school facility
modernization,
Chooses an administrative agency to award the
funds, such as the State Librarian or the State
Allocation Board,
Details the criteria to guide the administrative
agency's funding in each category,
Enacts enforcement and audit provisions, and
Provide for an election to approve the bond act.
Should the voters approve the bond act, the Legislature
then appropriates funds to the chosen state agencies to
fund projects consistent with the criteria, generally as
part of the Budget Act. The Department of Finance then
surveys departments to determine need for bond funds based
on a project's readiness, and then asks the Treasurer to
sell bonds in a specified amount. After the bond sale, the
Department of Finance determines which bond acts and
departments receive bond proceeds.
The Legislature has enacted several bond acts through the
years to fund water projects in the following total
amounts:
California Safe Drinking Water Bond Law of 1976
($172 million),
Clean Water and Water Conservation Bond Law of 1978
($375 million),
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California Safe Drinking Water Bond Law of 1984
($75 million),
Water Conservation and Water Quality Bond Law of
1986 ($150 million),
California Safe Drinking Water Bond Law of 1986
($100 million),
California Safe Drinking Water Bond Law of 1988
($75 million),
Water Conservation Bond Law of 1988 ($60 million),
Clean Water and Water Reclamation Bond Law of 1988
($65 million),
Safe, Clean, Reliable Water Supply Act of 1996
($995 million),
Safe Drinking Water, Water Quality and Supply,
Flood Control, River and Coastal Protection Bond Act
(2000) ($1.9 billion),
Safe Neighborhood Parks, Clean Water, Clean Air,
and Coastal Protection Bond Act of 2000 ($2.1
billion),
California Clean Water, Clean Air, Safe
Neighborhood Parks, and Coastal Protection Act of 2002
($2.6 billion), and
Disaster Preparedness and Flood Prevention Bond Act
of 2006 ($4.1 billion).
Additionally, voters have also approved the following bond
acts that funded water projects by initiative in the
following total amounts.
Water Security, Clean Drinking Water, Coastal and
Beach Protection Act of 2002 ($3.4 billion), and
Safe Drinking Water, Water Quality and Supply,
Flood Control, and River and Coastal Protection Bond
Act of 2006 ($5.4 billion).
The Legislature enacted the Safe, Clean, and Reliable
Drinking Water Supply Act (SBx7 2, Cogdill, 2010), which
directed the Treasurer to sell $11.14 billion in bonds to
fund drought relief, water supply reliability, Delta
sustainability, statewide water system operational
improvement, conservation and watershed protection,
groundwater protection and water quality, and water
recycling. The SBx7 2 bond provides $455 million for
drought relief, $1.05 billion for water supply reliability,
$2.25 billion for delta sustainability, $3 billion for
statewide water system operational improvement, $1.785
billion for conservation and watershed protections, $1
billion for groundwater protection and water quality, and
AB 1331 - 5/8/14 -- PageD
$1 billion for water recycling programs.
On February 26, 2013, this Committee and the Committee on
Natural Resources held a joint informational hearing
entitled "Overview of California's Debt Condition: Priming
the Pump for a Water Bond," where representatives from the
Treasurer's Office and Legislative Analyst's Office (LAO)
provided testimony relating to the state's general
obligation debt condition and the potential effects of
altering the SBx7 2 bond. A recording of the hearing and
related documents are available online:
http://sntr.senate.ca.gov/informationaloversighthearings
While the joint hearing provided significant data regarding
the state's debt condition, updated information as of May
1, 2014 shows a total of $127 billion of authorized debt,
$75 billion of which is outstanding, meaning the state
issued the bonds and is currently repaying them, and $25.2
billion authorized, but not yet issued, according to the
State Treasurer. California paid approximately $4.7
billion from general revenues to service that debt in
2012-13, $5.9 billion in 2013-14, and will pay $6.3 billion
in 2014-15, according to the Department of Finance.
However, these amounts are offset by payments of around $1
billion from other sources, such as truck weight fees.
The Legislature initially placed the SBx7 2 bond on the
November, 2010 ballot, but later moved it to November, 2012
(AB 1265, Caballero). In 2012, the Legislature again moved
the measure to the November, 2014 ballot (AB 1422, Perea,
2012). Concerned that the voters may not approve the $11.1
billion bond, the author wants to replace the measure with
a $8 billion bond to submit for voter approval in November,
2014.
Proposed Law
I. Bond Act. Assembly Bill 1331 repeals the SBx7 2 bond,
and instead enacts the Clean, Safe, Reliable Drinking Water
Act of 2014, which authorizes the issuance of $8 billion in
bonds upon approval of the voters in the November, 2014
election. The measure creates the Clean, Safe, and
Reliable Drinking Water Fund, into which the state deposits
bond proceeds for the Legislature to appropriate.
The measure directs funds for several purposes, each with
specified goals, conditions, and categories or specific
AB 1331 - 5/8/14 -- PageE
allocations, in the following amounts:
$1 billion for water quality improvement,
administered by the State Water Resources Control
Board,
$1.5 billion for multibenefit ecosystem and
watershed protection and restoration projects,
administered by specified conservancies in specified
amounts, or by Secretary of the Natural Resources
Agency,
$2 billion to respond to climate change and
contribute to regional water reliability, administered
by the Department of Water Resources (DWR) or the
Board depending on the category,
$1 billion for Sacramento-San Joaquin Delta
Sustainability, administered by DWR and the Delta
Conservancy, and
$2.5 billion for water storage for climate change
projects as selected by the California Water
Commission.
For more details on fund direction, please see the analyses
from the Senate Committee on Natural Resources and Wildlife
(available here:
http://www.leginfo.ca.gov/pub/13-14/bill/asm/ab_1301-1350/ab
_1331_cfa_20140324_092805_sen_comm.html ) and the Committee
on Environmental Quality (available here:
http://www.leginfo.ca.gov/pub/13-14/bill/asm/ab_1301-1350/ab
_1331_cfa_20140505_134238_sen_comm.html ):
AB 1331 includes standard provisions from bond acts, and
incorporates other provisions from the General Obligation
Bond Law by reference, except for its provisions that limit
the use of the proceeds from the sale of bonds. The bill
creates a finance committee to determine whether it is
necessary or desirable to issue the bonds. The committee
consists of the following members (or their designated
representatives):
The State Treasurer, as chair,
The Director of Finance,
The Controller,
The Director of Water Resources, and
The Secretary of the Natural Resources Agency.
The measure allows the Department of Water Resources to
request a loan from the Pooled Money Investment Board.
AB 1331 - 5/8/14 -- PageF
II. Administration. AB 1331 enacts the following
administrative provisions:
Programs may retain 5% of allocated funds for
administrative costs, and up to 10% for planning and
monitoring necessary for the successful design,
selection, and implementation of projects.
Watershed monitoring data must be sent to the
Department of Conservation consistent with its
watershed program data system.
The Administrative Procedures Act doesn't apply to
the bill's program development or implementation.
State agencies must develop and adopt project
solicitation guidelines before disbursing grants and
loans, which must contain specified contents, although
the agency may use past guidelines.
State agencies must hold three public meetings to
consider comments prior to disbursing grants and
loans, which must be published on the agencies'
websites 30 days before any public meeting, then
transmitted to the appropriate legislative fiscal and
policy committees.
State agencies must require adequate reporting of
expenditures.
The California State Auditor must annually conduct
a programmatic review and an audit of expenditures,
reported annually on or before March 1.
Bond funds can't be used to support project or
permit environmental mitigation, unless specified in
the bill, or to acquire water rights, pay the costs of
Delta conveyance systems, or pay for penalties or
correcting violations.
Declares that it doesn't affect specified statutes
and legal protections.
Limits applicants for bond funds to public
agencies, public utilities, federally recognized
Indian tribes, specified state Indian tribes, and
nonprofit organizations, although a public agency may
use funds to benefit recipients of mutual water
companies under certain conditions.
Bars funding specific projects.
Directs agencies to use the California Conservation
Corps' services whenever feasible.
Allows the Legislature to approve multiyear Budget
Change Proposals for bond funds.
Clarifies that bond proceeds are not subject to the
"Gann Limits" on government spending (California
Constitution, Article XIIIB).
AB 1331 - 5/8/14 -- PageG
The measure defines many of its terms, makes technical and
conforming changes, enacts several legislative findings and
declarations supporting its purposes, and also declares
specified findings made by the people of the State of
California.
State Revenue Impact
No estimate.
Comments
1. Purpose of the bill . According to the author, "Passing
a water bond that voters will approve in November is
critical to California's water future. The legal deadline
is June 26. AB 1331 offers a balanced package of funding
for the top priorities in water funding needs, while
ensuring accountability to voters for that spending. I
have developed this bill through a comprehensive and
transparent process that included public hearings on the
water bond across the state. While the Senate may wish to
consider increasing funding for some needs, such as
groundwater cleanup and recycling, gaining voter approval
necessitates that we keep the water bond measure under $10
billion."
2. Sixteen tons . Debt is an essential part of almost every
government, business, and personal balance sheet, as
borrowers seek funds from lenders in exchange for a future
commitment to repay them. However, evaluating the State's
general obligation debt is difficult; both the State
Treasurer and the Legislative Analyst's Office suggest
there's no correct amount. Instead, experts suggest that
states should look at three criteria: affordability,
comparability, and optimality<1>:
California's debt is affordable. The State Treasurer
estimates that the state will spend 7.7% of General Fund
-------------------------
<1>
Robert Wassmer and Ronald Fisher "Debt Burdens of
California State and Local Governments: Past, Present and
Future." As requested and supported by the California Debt
and Investment Advisory Commission. July 2011.
AB 1331 - 5/8/14 -- PageH
revenues on debt service in 2012-13. However, these costs
reduce the funding that is available for other priorities.
Debt service is one of the fastest growing state costs,
expected to reach $8.6 billion in 2017-18 assuming no new
authorizations, according to the Governor's Five-Year
Infrastructure Plan. The Plan proposes no new general
obligation bonds, instead relying on more limited
lease-revenue bonds because of this increased debt burden.
California's comparability to other states is less
favorable. The State Treasurer's Debt Affordability Report
contains the following chart:
------------------------------------------------------------
|Debt Ratios Of 10 Most Populous States, Ranked By Ratio Of |
|Debt To Personal Income |
| |
------------------------------------------------------------
|----------------+-----------+--------+---------+-----------|
| State | Moody's/ |Debt To |Debt Per | Debt As A |
| | S&P/ |Personal|Capita(b)| % |
| | Fitch(a) | | | Of State |
| | |Income(b| | GDP(b)(c) |
| | | ) | | |
|----------------+-----------+--------+---------+-----------|
|Texas |Aaa/AA+/AAA| 1.5% | $580 | 1.16% |
| | | | | |
|----------------+-----------+--------+---------+-----------|
|Michigan |Aa2/AA-/AA | 2.2% | $800 | 2.05% |
| | | | | |
|----------------+-----------+--------+---------+-----------|
|North Carolina |Aaa/AAA/AAA| 2.4% | $853 | 1.89% |
| | | | | |
|----------------+-----------+--------+---------+-----------|
|Pennsylvania |Aa2/AA/AA+ | 2.8% | $1,208 | 2.66% |
| | | | | |
|----------------+-----------+--------+---------+-----------|
|Ohio |Aa1/AA+/AA+| 2.8% | $1,047 | 2.50% |
| | | | | |
|----------------+-----------+--------+---------+-----------|
|Florida |Aa1/AAA/AAA| 2.8% | $1,087 | 2.78% |
| | | | | |
|----------------+-----------+--------+---------+-----------|
|Georgia |Aaa/AAA/AAA| 3.0% | $1,061 | 2.51% |
| | | | | |
|----------------+-----------+--------+---------+-----------|
AB 1331 - 5/8/14 -- PageI
|Illinois | A3/A-/A- | 5.7% | $2,526 | 4.85% |
|----------------+-----------+--------+---------+-----------|
|California | A1/A/A | 5.8% | $2,565 | 4.98% |
|----------------+-----------+--------+---------+-----------|
|New York |Aa2/AA/AA | 6.3% | $3,174 | 5.36% |
-----------------------------------------------------------
------------------------------------------------------------
| | | | |
|Moody's Median All States | 2.8% | $1,074 | 2.47% |
| | | | |
|-----------------------------+--------+---------+-----------|
| | | | |
|Median For The 10 Most | 2.8% | $1,074 | 2.59% |
|Populous States | | | |
| | | | |
------------------------------------------------------------
------------------------------------------------------------
| |
|(a) Moody's, Standard & Poor's, and Fitch Ratings as of |
|September 2012. |
| |
|(b) Figures as reported by Moody's in its 2012 State Debt |
|Medians Report released May 2012. As of calendar year end |
|2011. |
| |
|(c) State GDP numbers have a one-year lag. |
| |
| |
------------------------------------------------------------
Determining optimality or whether government is investing
in the quantity and quality of public capital desired by
residents, and financing the appropriate share with debt,
is very difficult. LAO recommends that the Legislature
consider the recently released Five-Year Infrastructure
Plan as a starting point to developing a coordinated
approach to infrastructure funding, and establish a
committee to focus on statewide infrastructure. In the
water area, LAO recommends:
Reduce infrastructure demand,
Ensure that beneficiaries and polluters pay,
Decide on a mix of state funding mechanisms and
sources, and match them with each activity,
Use bond funds for large capital projects that meet
a need over several decades, and
Determine relative priority for water
infrastructure as part of the state's total need.
AB 1331 - 5/8/14 -- PageJ
3. Power to the people . AB 1331 repeals the larger SBx7 2
bond, and replaces it with one more than $3 billion
cheaper. However, any debt analysis is contingent on
whether voters are more likely to approve this bond, the
previous one, or none at all: Should AB 1331 be enacted,
the voters will decide whether to add $8 billion to the
total of authorized general obligation bonds, thereby
limiting the amount voters could add on top of California's
current $127 billion total. However, the state won't incur
any debt should the Legislature choose not to replace the
SBx7 2 bond, or voters reject it.
4. The good news . Investors ultimately determine a
state's creditworthiness and the interest rate paid on a
bond when they bid to purchase one. However, ratings
issued from the three major ratings agencies often inform
investors and the public regarding the investment risk of
purchasing a California general obligation bond. These
ratings change over time in response to a state's fiscal
situation and economy, among other factors. In January,
ratings agency Standard and Poor's raised the outlook on
the state's general obligation debt from stable to
positive, which often portends an upgrade, following on the
agency's boost for California from A- to A last year, as
well as Fitch's upgrade last August. However, the state
still has the second lowest rating in the nation.
5. The bad news . California has a distinct problem: of the
$127 billion that voters have authorized, almost $25
billion hasn't been issued yet. The state hasn't issued
almost $7 billion in transportation bonds, and $9.2 billion
in high speed rail bonds, because the projects haven't yet
received the needed approvals. Should the voters approve
new general obligation debt for water, the state would
either have to sell sufficient debt to fund everything, and
increase debt service costs accordingly, or choose which of
these projects should be funded first. Additionally, the
Committee approved SB 1086 (DeLeon) that calls for bonds in
unspecified amounts for parks, and the Assembly recently
approved AB 2235 (Buchanan), which the Committee will
likely hear later this month, would place a measure before
voters to approve $9 billion in bonds for school
construction.
6. Options . AB 1331 is one of two bonds under active
consideration in the Legislature this year. In February,
AB 1331 - 5/8/14 -- PageK
the Committee approved SB 848 (Wolk), a $6.825 billion
bond, which is currently in the Senate Committee on Rules.
Neither measure has yet received the 2/3 vote necessary to
advance from either Floor.
Senate Actions
Senate Environmental Quality 5 - 2
Senate Natural Resources and Water 7 - 2
Assembly Actions
Assembly Floor 60 - 0
Assembly Appropriations 12 - 0
Assembly Water, Parks and Wildlife 10 - 0
Assembly Rules 11 - 0
Support and Opposition (06/04/14)
Support : California Association of Professional
Scientists; California Association of Sanitation Agencies;
California Urban Partnership; California Water Association;
California Watershed Network; City of Beaumont; City of
Long Beach; Eastern Municipal Water District; Long Beach
Board of Water Commissioners; Long Beach Water Department
(if amended); Metropolitan Water District of Southern
California (if amended); Professional Engineers in
California Government; Orange County Business Council; San
Francisco Chamber of Commerce; State Building and
Construction Trades Council; Trust for Public Land; United
Farm Workers of California; Upper District; Urban Forest
Coalition; Water Bond Coalition; Water Reuse.
Opposition (unless amended) : Association of California
Water Agencies; Northern California Water Association.
No Position : Sierra Club of California; Rural County
Representatives of California